TECH DEVELOPMENTS: With SAP's release of its Q1 2010 earnings, it is clear that those who saw an irresistible shift from licensed software to software-as-a-service (SaaS) are a bit premature in their obituaries for the licensed software model. SAP's license revenues increased by 11% in euros, and by 18% when its euro revenues are converted into dollars at the average exchange rates in Q1 2010 and Q1 2009. Oracle's license revenues for its fiscal quarter ending February 2010 rose by 13% in US dollars (and 7% in euros). Among other vendors, Lawson reported a 28% increase in its license revenues (in dollars), and Epicor reported 23%.

These growth rates partly reflect how badly licensed software (which is treated as capital investment) got hit in the general cutbacks in business corporate investment in 2009, as panicked companies scrambled to conserve cash and avoid having to borrow from shut-down financial markets. However, I think there's more to the recovery than rebound from depressed levels a year ago.

Forrester's surveys of companies about why they don't like software-as-a-service consistently turn up five reasons: 1) inability to customize; 2) difficulty in integration to other systems; 3) security of data and information; 4) worries about pricing models that put clients on a constantly rising escalator; and 5) lack of SaaS products. SaaS vendors are addressing all of these, and there is no question that these barriers are eroding. But they still persist, and mean that the license software model has a high degree of persistence in software categories like core ERP systems (integration and security of core data), industry-focused applications (need for customization), eProcurement products (integration to ERP systems), and contract life cycle management products (security of contract data).

I think there are two other barriers to SaaS that we can add to this list for software markets outside the developed economies. One software vendor that I talked with reported that it had found that clients in China chose its licensed software model to competitors' SaaS offerings. Let's think about why -- if you are private company in China, do you really want to have all of your corporate data and information at a SaaS vendor where it is potentially accessible to Chinese government officials who want to see what's there? Similar concerns could exist in Russia, Venezuela, or other countries with authoritarian governments and weak legal systems. So, retaining control of your corporate data and systems could be a barrier to SaaS -- and a reason to prefer licensed software -- in markets like these.

Now, consider a company in Nigeria, Brazil, Indonesia, or India, where electricity distribution is erratic and network outages are common. Using a SaaS offering in markets like these could mean that at critical moments you could not access your data and applications due to network outages. Much better to have licensed software running in your own premises, with back-up generators to keep the electricity flowing and the systems running. So, systems continuity and performance is another barrier to SaaS in emerging markets, and a compelling rationale to use licensed software.

Given these factors, it is not surprising that SAP's best licensed software sales came in Asia Pacific (up 23% in euros, and 31% in US dollars) and the rest of the Americas (up 25% in euros for combined license and maintenance revenues, and 32% in US dollars).